Labor market surprise

The end of the beginning, or the beginning of the end? Friday’s employment report raises questions about whether the economy is entering a slower period. 

No question about it: the 114,000 new jobs added in July were well below expectations of 175,000, made worse by the 29,000 jobs revised away from May and June. The unemployment rate rose from 4.1% to 4.3%, average hourly earnings fell from a 3.8% annual pace to 3.6%, and average weekly hours worked edged lower. Weather may have played a role in depressing the jobs tally; the Bureau of Labor Statistics data show that 436,000 people in nonagricultural jobs were unable to work due to inclement weather, more than 10 times the historical average, so there may be a revision of this month’s poor tally.

The Federal Reserve also met last week, and to no one’s surprise, did not cut its key federal funds rate. Chair Powell reiterated that the Fed is focused on its dual mandates of maximum employment and stable prices, and it is worried about reducing rates either too early or too late. The Fed is encouraged by the progress on reducing inflation, but still needs to see more data that would confirm its view. The market expectation following the meeting was that the Fed would likely cut at its next meeting, on September 18, barring a sharp reversal of the progress to date. 

Following the release of the monthly jobs data, market expectations for rate cuts increased sharply, with cuts seen at each of the next Fed meetings.